300. I can see the value from your point of
view of that degree of clarity, because you need it for planning
purposes, it is really how one gets there, is it sufficient to
rely on agreements, protocols, because you were implying at the
beginning, when I asked about statute, that there might be a downside
as well as an upside?
(Mr Armour) The alternative is perhaps a super regulator
that regulates everything, but that simply internalises the problem
of trade-off inside the regulator. I think actually we are more
comfortable with a variety of regulators, where there is a degree
of focus on what they are trying to achieve, and then a work-out
of the trade-off between the regulators.

Chairman: Yes, fine; thank you very much.

Earl of Mar and Kellie

301. From what you said, I am getting the impression
that probably you are unable to make any changes in your site,
or the equipment on it, without the consent of one of the regulators;
is that the correct impression? And a second question I would
like to ask is, on occasion, you must need planning consent from
the local authorities; how do the regulatory authorities mesh
in with that, and are they helpful, or unhelpful, in that process,
or how does it work?
(Mr Armour) Two questions. In terms of the sites,
yes, effectively, any material change on the site does require
regulatory approval. It may require it from the NII on safety
grounds, and it may require it on environmental grounds. Similarly,
any change in manning on the site has to be evaluated on its safety
implications, and effectively that is under a regulatory regime.
So we are fairly closely regulated in all these aspects. In terms
of the planning regime, we have the option of going under the
normal planning law or under what is called Section 36 of the
Electricity Act, which creates a separate regime for the electricity
industry for major projects; now it may or may not involve EU
approval as well, because of the nuclear nature of our business.
In practice, we have a good relationship with local authorities,
but the local authorities will rest heavily on the opinion of
the safety regulators as to the appropriateness of, let us say,
the construction or development that we are looking at on our
sites, and they will rely heavily on the expertise of the regulators
in coming to a view on the process.

Lord Elton

302. I confess to being surprised by your suggestion,
in paragraph 27, that Ofgem should be obliged to publish its annual
accounts, I am surprised, and I was not aware that it did not.
Is this the same with other regulators?
(Mr Armour) It publishes an annual report, but the
report does not give the figures. It publishes an annual plan
which says what it forecasts spending. I am not entirely sure.
I suspect Ofgem returns its accounts to the Treasury, or to some
other accounting body within government, but it is not something
that is open to the scrutiny of the regulated bodies at this point
in time. I think generally we feel transparency would be helpful;
there is a variety of practice we see among our regulators. To
take one extreme, SEPA, in Scotland, holds its board meetings
partially in public, it will publish its papers, its minutes,
and there is a fairly clear view as to the general debate; now
if it is dealing with specific companies then that comes out and
effectively is redacted, but otherwise it is in the public domain
to see the regulatory consideration of trends going on. Other
regulators, inevitably, the security regulator does not publish
anything in that way, so there is a broad spectrum. I think, in
this one, we are saying it would be helpful, having said "There's
the plan, this is what we forecast spending," to know what
we actually spent it on; in the same way as we are all publishing
accounts.

Lord Elton: I quite understand that. Thank you.

Chairman

303. If I can come on to another aspect, you
have emphasised particularly the importance of transparency and
accountability in the process, and quite naturally the focus of
the paper essentially is the relationship between yourselves and
the regulators. You touch upon, in response to other questions,
and our core premise, the relationship between the regulator and
the Government, and you accept the point there that, on the one
hand, the regulator needs to be independent, yet, at the same
time, there has to be some relationship to Government, or at least
Government policy, in delivering the Government's energy policy.
I wonder how you ensure that there is a correct balance, that
the regulator is not too much influenced by Government, and, indeed,
what principles ought to govern the relationship, because the
Government is the Government, it is the people's elected representative,
so there is going to be some public policy within the context
in which the regulator operates? I just wondered if you had a
view on that, because you touch upon it in the paper, but there
is not actually a recommendation that really derives from that?
Is the present relationship sufficiently satisfactory, or is there
a need for change, and, if so, what should it be?
(Mr Armour) It is quite difficult. I have some sympathy
for the regulators. Government sets the policy, the regulators
effectively are required by statute to follow the statute and
powers that they are given. I think the difficulty comes for us
where that takes you down a single route, in the case of British
Energy. One of the issues for us has been that the current market
in electricity prices does not value sustainability, does not
value the environmental benefit of our generation being CO2-free.
It is economic regulation, but no value is put on the environment.
That may change over time, depending, if a trading scheme comes
in, or carbon taxation, or whatever, but at this point it has
not. And, therefore, regulation, naturally enough, is focused
on the remit that the regulator is given, it does not reflect
the wider realities of the market of government policy. Now how
you reflect that, and, of late, Government has said, "We
want regulators to take more account of social and environmental
and other factors;" in the past it has not, and the regulator
has said, rightly, "I have been given no guidance, I have
a remit that is competition, therefore I will follow that remit."
So I have a degree of sympathy with the regulators, but somehow
the regulatory remit must keep up with the agenda; now if it keeps
up with the agenda too much there is no certainty, and, secondly,
if it becomes too wide and woolly there is no accountability,
because a regulator can say, "Well, actually you can't challenge
me on anything because I'm following X, Y and Z, and you'll never
pin me down." So there is a difficulty. And equally it is
important that a regulator has the ability to say, "I am
here charged with the interests of consumers," or whatever
it is, "and I am not going to be swayed by a pressure from
time to time to take me away from what I think actually is the
right way going forward." You are flagging up the problem
and I am not sure we have a solution.
(Mr Love) I think it is a very difficult area. The
Utilities Act changed the statutory duties of Ofgem, effectively,
or the Authority, as it was defined, basically to say a primary
duty is to protect the interests of consumers, wherever possible,
by introducing competition, whereas the previous duty was to promote
competition. And also they were given a kind of secondary level
that said, "You must be mindful of guidance on social and
environmental issues given by the Government." Now "being
mindful" is about as low as it gets, in terms of giving a
priority, and, to be honest, the guidance that Ofgem received
from the Government on social and environmental issues was woolly.
I think, as Robert said, I do not think it really helped Ofgem
in terms of trying to prioritise where it should be putting its
efforts, and it is a very difficult area. Clearly, the Government
should be setting policy and Ofgem should be carrying out their
statutory duties. It is that grey area in-between; that is difficult
unless you were to consider a change in the statute that said,
"Wherever possible, by introducing competition," and
adding "Wherever possible, in a manner consistent with Government
energy policy," or something like that, but that does not
exist at the moment. Possibly it is something for consideration.
(Mr Armour) It is something that is touched on in
the Trade and Industry report that came out the other day.[5]
If one takes the case of a specific example, which is current,
looking at proposals to put in transmission access and loss arrangements
and zonal pricing. From an economic point of view, this may have
some particular logic, in trying to reduce losses; there is a
question as to whether the benefits are worth the cost of implementing
the arrangement, and we would argue not. But, in moving forward
with that, effectively, it will have an impact on the viability
of generation in the north, compared with generation in the south.
Now what that does then is discourage renewable development in
the north east and north west, or CHP development in various parts
of the north of the country, so there is an incompatibility with
government promotion for renewables and, at the same time, discouragement
through the transmission charging. We have seen it in NETA, in
the sense of saying, "This is a regime that is put in to
provide competition," but, if you happen to be a very small
generator, the idea of manning your trading operation 24 hours
a day, if you have only one wind farm, is a hugely onerous task.
So how you get these compatibilities and put the two together,
and the regulator has said, rightly, "That's not my problem,
that's Government's problem," but somehow these things must
be joined up, otherwise you get unintended consequences.

304. Presumably, the nature of the structure,
where it operates, there is always going to be the danger of that
happening, for the reasons you have given, and you provided a
very clear and succinct analysis of the problem, in terms of the
relationship between the regulator and Government policy. As you
have indicated, there is not necessarily a clear answer as to
how you resolve it; so does it mean therefore that one is dependent,
essentially, upon the quality of the regulators. And I suppose
that does raise the wider question in that context, it is one
we have been looking at, and various witnesses have commented
upon, the choice between an individual regulator and a board?
(Mr Armour) And the quality of the remit that is given
to the regulator, as well.

305. Yes; so if you put the two together. And
do you have a view, you could say it is academic now, in terms
of what the statute provides, and so on, between an individual
regulator and actually a board for undertaking the regulation?
(Mr Love) Yes. One rationale in energy for moving
from an individual regulator to a board was to try to depersonalise
the regulatory role and to put some checks and balances by having
appropriate corporate governance, in terms of executives and non-executives,
into that board, into the Authority, effectively. I think, broadly
speaking, it has worked well. I think the concerns, if we have
any, would relate to the size of the board. Does it become unwieldy?
And the appointment of another non-executive director of Ofgem,
last week, means that the balance looks like it might become four
executives and eight non-executives on the board. It is a large
board, and splitting the chief executive and chairman role, of
course, creates another member of the board as well, which we
fully support, that one. So broadly it has worked well. The area
where perhaps we would have some concern would be in the transparency
of the operation of the Authority, and we mentioned in there,
and Robert has already mentioned, the comparison with SEPA, where
perhaps it would be helpful if they could publish agendas of their
Authority meetings and suitably-amended minutes of the meetings,
so the industry could see the issues that they discussed, how
they balanced their various duties, in coming to their decisions,
and it would help lower the regulatory uncertainty that we suffer.

Lord Jauncey of Tullichettle

306. When it becomes necessary, in a regulatory
decision, that social consequences should be taken into account,
for example, provision of payphone boxes in remote rural areas,
where they are certainly not going to pay, possibly running train
services, again in rural areas, will not pay, how do you feel
that should be dealt with? Do you think it should be left to the
regulator to make the balance, or do you think that there should
be a firm decision by the Minister as to what the social consequences
are to be, leaving it to the regulator to operate, so to speak,
one debt?
(Mr Love) I do not think it is the regulator's job
to make social policy. The economic regulator is responsible for
primarily economic regulation. I think it is a matter for the
Government to set the framework correctly. If the Government decide
that protecting the interests of people in rural communities,
or protecting the fuel-poor, is a priority then they should make
sure that the framework that the regulator operates within makes
that absolutely crystal clear, that his job is defined within
the statute to do that, or through secondary legislation, or secondary
advice or guidance, given by Government to the regulator, so he
is absolutely clear.
(Mr Armour) If I take an example, which probably is
close to home for you, in the Electricity Act, there was special
provision made for the hydroelectric franchise area, in the sense
of, here was the largest franchise area in the country, with a
much higher cost of maintaining the electricity wires, and indeed
one of the few areas in the country where you are still trying
to connect people, and therefore the regulator was empowered to
make some allowance in setting the targets for returns in that
area that was differential from the rest of the country. So there
you have a specific remit that said, "Okay, there's a competition
floor, but here is something else you can take into account appropriately."
I think that worked quite well.

Earl of Mar and Kellie

307. I would like to go back to the remarks
you were making about the connection charge to the National Grid,
and I think that Mr Love said that it was £35 million a year?
(Mr Love) Of that order. It is not just connection
charges, that is for the use of the Grid as well.

308. Yes; connection and use. It is my belief
that you sell electricity wholesale to distribution companies,
but from that sale you must then pay for the connection and use
from the National Grid. What I am really interested in is whether
the connection charge is related to the amount of electricity
actually flowing into the Grid, and whether the regulator gets
involved with that?
(Mr Love) Yes; taking that in order. We sell our power
that we produce in a fully competitive, wholesale market. There
is a variety of purchasers of that power: The ultimate use of
it is to supply electricity to customers, so suppliers buy our
electricity ultimately, it may go through traders, who package
up parcels of power they buy from different generators, but ultimately
it ends up supplying customers.
(Mr Armour) But it is not necessarily linked to actual
use of the Grid; it is related to the amount of volume that we
put in, but we are deemed to sell it to the national balancing
point, which is somewhere between
(Mr Love) It is somewhere near Coventry.
(Mr Armour) So it is deemed to trundle down there
and trundle back up. Now, in practice, we produce 50 per cent
of the electricity in Scotland, and we sell that to Scottish Power,
and Scottish and Southern; whether actually it trundles down to
Coventry or not is perhaps a moot point, but, nevertheless, that
is the way the system operates.
(Mr Love) The connection charges we pay relate to
the assets that are on the ground, the wires that are required
to provide the connection, they are not related to the electricity
that we put in. The use of the Grid is related to the extent to
which we use it, effectively, it is based on the energy that flows
into the Grid, so there are two components.

309. Right; but, in arriving at the idea that
you should pay £35 million a year, is that at a standard
rate, or did the regulator pull that figure out of the sky?
(Mr Love) No; it is at a standard rate, but the standard
rate is approved by the regulator.

310. And it does not matter how you generate
it; if the electricity is generated, for example, on a wind farm,
the connection and National Grid charges are going to be the same?
(Mr Love) No. There will be a different regime, depending
on the voltage at which you are connected. A wind farm is very
unlikely to be connected to the very large wires, the big towers
and the very large wires, that we are connected to; they are more
likely to be embedded in the local distribution network and connected
at a much lower voltage. Typically, we are connected at 275,000
volts, or 400,000 volts, to the Grid.
(Mr Armour) If you compared us with a coal plant or
a gas plant going on to the high Grid, it would be per unit of
electricity.

Earl of Mar and Kellie: I think that we could get
very bogged down in that. Thank you, My Lord Chairman.

Chairman: Yes; I might say, we might even get a shock.
Right; thank you very much, Mr Armour and Mr Love. I am conscious
of the time, and you have been very generous, both with your time
and the effort you have put into preparing the paper for us, which
has been extremely valuable for our purposes; we are extremely
grateful to you. Thank you very much indeed.